In the current squeeze on the junior sector, much has been said about the challenges in raising money and the impact of lower precious metals prices on the cash costs and feasibility of future projects. However, in these tough markets, another metric that investors should pay close attention to is the General and Administration (G&A) expense ratio.
With capital more scarce than ever, the G&A expense ratio shows how prudent a given management team is in advancing their projects. Management may say money is going in the ground, but a look at this simple figure will show investors the distribution of money going towards exploration in comparison to the upkeep of management salaries, rent, travel, investor relations, and other administration costs.
Note: Our G&A expense ratio is a proprietary measure that is non-GAAP and non-IFRS compliant.
In our Tickerscores system, the G&A expense ratio is an important component of how we calculate scores for management teams. We also use empirical measures such as management and institutional ownership, YTD insider buying, and M&A experience.
In this article, we share some of the trends and results we found after calculating over 300 G&A expense ratios in various jurisdictions. We’ll highlight a few of the companies that are remaining particularly disciplined - and we’ll also give some examples of management teams that seem better at putting shareholder money into their own pockets rather than the ground.
Above is the distribution of G&A expense ratios throughout the companies that we have evaluated so far. The lowest numbers we found were around 10%, and we found 22 companies with G&A expense ratios above 90%. This wide range is indicative of the quality of companies that can be found in the sector.
Also, we found G&A to have low, negative correlations with cash, market capitalization, and months of cash left (at our blended burn rate we calculate for each company). The r² values were -0.17, -0.22, and -0.13 respectively. These are not significant correlations. The significance of this – to an investor – is that if you are looking at just cash, market capitalization, and burn rate, the likelihood of extrapolating any of this to a G&A expense ratio is improbable. Therefore, an investor should check this metric (G&A) independent of other information before making an investment.
Regional and Stage Differences
The average G&A ratio varies between jurisdictions quite significantly. Further, we found exploration companies and development companies to each have very different results as well. This again speaks to the complexity of this figure – which means one size does not fit all.
Because the sample sizes for each of these datasets is much smaller, also note that outliers can have a big impact. For example, without Torex, Mexico’s development circle would drop all the way to $10 million cash on average (Torex has around $380m in the bank). Nevertheless, you can see a trend in G&A especially with companies with projects in Quebec and Atlantic Canada and BC.
Our analysts have prepared a few examples of companies that are being disciplined with shareholder money. In the long run, it is companies like these that we believe have a higher chance of discovery or proving up resources. We have also listed three companies that we believe should be put in “the penalty box” – these are companies that are spending hard-earned shareholder dollars on everything but exploration.
Low G&A Expenses
Paramount Gold & Silver (PZG.T)
Paramount sits with $11.5 million in cash and only $300k in liabilities. They spent $12m in exploration expenditures, which equals an 18.6% G&A ratio.
Silver Bull Resources (SVB.T)
Silver Bull has $6.1 million in cash and $1.4 million in liabilities. They spent a total of $1.3 million on exploration expenditures with a 28% G&A ratio.
CB Gold (CBJ.V)
CB Gold has $5.6m in cash and their current / cash ratios are greater than 5. With 18% insider ownership and 31% of expenses going to G&A, we feel management interests are aligned with shareholders.
High G&A Expenses
These are real examples pulled from our system that are wasting shareholder dollars.
Unique Resources Corp. (UQ.V)
This company is in hibernation mode and has not done work on its major property in a year. It only spent $15,000 in the quarter and had a 93.3% G&A expense ratio.
China Minerals Mining Corp. (CMV.V)
While this company seems to have potential project-wise, the G&A shows management’s true colours. In fact, a property related news release hasn’t been issued since October 2012. This company is also in hibernation mode with 89% of expenses going to non-property or exploration-related expenses. Finally, the management team owns only 0.8% of common shares which represents virtually zero vested interest and belief in the project.
Quia Resources (QIA.V)
For this one, all you need to see is just a screenshot of their income statement.
You’ll see that they are spending 3X more on their office than they are on exploration-related expenses.
Conclusion
Look for management teams that respect the cash that has been raised by investors. Also, be aware of companies that go into “hibernation mode”.
In the long run, always remember that disciplined management teams with cash in the treasury and low G&A expenses are going to have a better chance at making a discovery or proving up a resource.
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Originally posted in the VC+ Market Trends Blog
G&A as a percent of total expense is not an accurate measure. Long-term assets such as mineral properties are often capitalized as are borrowing costs (and many other BS items). The point is well received though.